- July 29, 2022
- Posted by: Ramkumar
- Category: Posts

Decline In Corporate Governance
As Russia’s invasion of Ukraine has ruled global headlines this week, two other issues that made my head turn were the episodes involving the National Stock Exchange of India Limitedย andย ABG Shipyard Ltd. In one instance, a ๐๐๐๐๐ฅ๐๐ฌ๐ฌ ๐ฒ๐จ๐ ๐ข ๐ก๐๐ ๐ ๐๐๐ ๐ฎ๐ง๐๐๐ซ ๐ก๐ข๐ฌ ๐๐จ๐ง๐ญ๐ซ๐จ๐ฅ. In another example, a firm ๐ฐ๐ต๐ฒ๐ฎ๐๐ฒ๐ฑ ๐ฎ ๐ฐ๐ผ๐ป๐๐ผ๐ฟ๐๐ถ๐๐บ ๐ผ๐ณ ๐ฎ๐ด ๐ฏ๐ฎ๐ป๐ธ๐ ๐ผ๐ณ ๐ฅ๐ ๐ฎ๐ฎ,๐ด๐ฐ๐ฎ ๐ฐ๐ฟ๐ผ๐ฟ๐ฒ๐ ๐ฏ๐ฒ๐๐๐ฒ๐ฒ๐ป ๐ฎ๐ฌ๐ญ๐ฎ ๐ฎ๐ป๐ฑ ๐ฎ๐ฌ๐ญ๐ณ. However, the banks failed to report this fraud till 2022.
As the standards of ๐ฐ๐ผ๐ฟ๐ฝ๐ผ๐ฟ๐ฎ๐๐ฒ ๐ด๐ผ๐๐ฒ๐ฟ๐ป๐ฎ๐ป๐ฐ๐ฒ ๐ฐ๐ผ๐ป๐๐ถ๐ป๐๐ฒ ๐๐ผ ๐ด๐ฒ๐ ๐ฑ๐ฒ๐ฝ๐น๐ผ๐ฟ๐ฎ๐ฏ๐น๐ฒ, as an investor/analyst, i factor this when valuing companies primarily in the emerging markets in the following ways:
1)๐ง๐ฟ๐ฒ๐ฎ๐ ๐ฏ๐ฟ๐ถ๐ฏ๐ฒ ๐ฎ๐ ๐ฎ๐ป ๐ผ๐ฝ๐ฒ๐ฟ๐ฎ๐๐ถ๐ป๐ด ๐ฒ๐ ๐ฝ๐ฒ๐ป๐๐ฒ: When i value companies, especially Chinese/Indian firms, i add an operating expense – bribes to corrupt officials. Further, I am building a model on a firm’s efficiency in bribery and treating it as a competitive advantageย for firms that are good at getting results for their bribe payments.
2)๐๐ซ๐๐๐ญ ๐๐จ๐ซ๐ซ๐ฎ๐ฉ๐ญ๐ข๐จ๐ง ๐๐ฌ ๐๐ง ๐ข๐ฆ๐ฉ๐ฅ๐ข๐๐ข๐ญ ๐ญ๐๐ฑ:ย In an alternate scenario, i treat corporate Corruption as an implicit tax to do business in that country.ย PwC comes up with an opacity index that adds an operating cost to do business in a country and converts it to an effective tax. For instance, they estimated the effective tax for China as 46%.
3)๐๐ง๐๐ซ๐๐๐ฌ๐ ๐ญ๐ก๐ ๐๐จ๐ฌ๐ญ ๐จ๐ ๐๐๐ฉ๐ข๐ญ๐๐ฅ ๐ญ๐จ ๐๐จ๐ฏ๐๐ซ ๐ ๐จ๐ฏ๐๐ซ๐ง๐ฆ๐๐ง๐ญ ๐ฉ๐๐ซ๐ญ๐ง๐๐ซ๐ฌ: For a firm in the emerging markets whose biggest customer is theย #government, the firm usually gives a share of its profits to corrupt officials. Thus, I increase the WACC of such a firm by a factor, and the firm needs to generate a higher return to offset these cash outflows.
In my view, ๐ฉ๐จ๐จ๐ซ ๐๐จ๐ซ๐ฉ๐จ๐ซ๐๐ญ๐ ๐ ๐จ๐ฏ๐๐ซ๐ง๐๐ง๐๐ ๐ข๐ง ๐๐ฆ๐๐ซ๐ ๐ข๐ง๐ ๐ฆ๐๐ซ๐ค๐๐ญ๐ฌ ๐ข๐ฌ ๐ ๐ซ๐๐๐ฅ๐ข๐ญ๐ฒ and analysts/investors must factor in this issue when valuing companies. Therefore, while you may disagree with my above framework, i recommend that analysts add a cost/risk layer when valuing companies in emerging markets that incorporate poor corporate governance.
[…] the next five years, we will see moreย #startups publicly listed, and corporate governance is one of the dark points not addressed when these startups were […]